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Reforming faulty wheat policy
By Nasir Mahmood Khosa
Recently two articles came out in Dawn – one titled “Flawed
wheat policy” that argued that the wheat policy was flawed
because there was more reliance now on the private sector. The
second article titled “Distortions in wheat marketing” said
that the wheat policy remained flawed because of exactly the
opposite reasons — lack of enough reliance on the private
market.
 Recently
there was an editorial also in the newspaper, which argued
that liberalization of import of wheat has been inappropriate.
Instead, more stringent steps should have been taken to rein
the hoarders.
This article demonstrates that a phased reform is underway to
promote private sector’s constructive role in wheat marketing.
The overriding objective of the reform programme is to promote
efficient markets for wheat in order to ensure market-based
incentives to farmers. Progress in reform has already produced
positive results.
The government intervenes in the wheat market, through
procurement and sale. The provincial food departments (PFDs)
sell majority of their wheat stocks to private flour mills at
the official release (or issue) price. Until recently, the
government sometime imposed controls on movement of wheat for
fulfilling procurement target at an announced price, which was
supposed to be guaranteed minimum (floor) price. Last year the
practice of ban on wheat movement was discontinued. It now
announces floor price at which farmers can sell voluntarily.
Until recently, issue price included an element of subsidy.
Trends in procurement, release and wholesale prices show that
the issue price was only occasionally below the procurement
price and never higher than the procurement price plus the
margin necessary to fully cover marketing costs. This means
subsidies were incurred, paid mainly by the provincial
governments for domestic procurement, for keeping flour prices
for consumers under control.
Until recently, the subsidy by provincial governments has been
substantial (see the Table ).
Subsidies for imported wheat were made by the federal
government. The PFDs buy imported wheat from the federal
government at the same release price at which they sell
domestically produced wheat to private millers.
So, the difference between the import cost and the price paid
by the PFD are met by federal subsidy. For the year imports
are made, the subsidy payment per ton has been quite variable,
ranging between Rs300 per ton and to Rs2,000 per ton.
As the Table shows, total subsidy payments have fluctuated
dramatically, as a result of both variations in per ton
subsidy and the level of imports.
During 2003-04, the total import was 1.5 million tons and the
total subsidy was more than Rs12 billion. Thus the size of the
total subsidy has been enormous – more funds were spent on
wheat subsidies to consumers than public expenditure on crop,
livestock, forestry and fisheries combined, for producers.
The objective of the reform programme is to change intervening
role of the government and use market based approach to attain
two policy goals that the government pursues now — food
security (ensuring availability of food at affordable price to
consumers) and guaranteeing a minimum price to the producers.
The proposed reform programme will eventually change radically
the role and functions of public food agencies, which will
only confine to policy-making, monitoring food situation,
executing a regulatory framework and maintaining a strategic
stock of wheat.
The essential elements of the new policy are as follows: a) A
clear distinction will be made during stock build-up between
guaranteed minimum price (fixed and announced before sowing
season) and procurement price (variable and dependent on
market conditions). b) A strategic reserve (initially one
million metric tons [mmt]) will be maintained for price
stabilization and for emergency purposes, and this should be
distinct from the operational stock to be used for regular
releases to market during transition to new wheat policy,
targeted allocations for specific groups (e.g. military) and
targeted food for the poor. c) Government may, through a body
of experts, determine a price band for wheat procurement and
marketing, of which the lower end is dictated by the objective
of providing incentives to growers and the upper ceiling is
pre-determined to serve the interest of the consumers. Within
this price band, the private sector will be allowed to
function freely and unhindered. d) The existing food subsidy
programmes for the underprivileged will be extended to
carefully target the poorest of the poor. e) Import and export
of wheat is open to the private sector. f) Producers of wheat
are free to sell either to government procurement agency or to
private sector. g) A strong forecasting and information system
is being devised to provide timely information to policy
makers and transmit signals to the private sector.
Results of the new policy: The new market-friendly wheat
policy has already produced some positive results. No
restriction on movement of wheat was placed, growers
voluntarily sold at the guaranteed minimum price and a
distinction was made between operational reserve and strategic
reserve.
Private sector actively participated in the market and as a
result growers got good price for their output. Private
sector’s total purchase from the market has been nearly two
million tons (compared to 1.3 million tons last year). Sindh
bought the targeted amount. Punjab Food Department and PASSCO
also bought as much operational reserve as these agencies
aimed for.
Only in one area, the implementation of the policy diverged
from the plan and the result fell somewhat short of
expectation.
Punjab and PASSCO could not procure as much as these agencies
had planned for in building up their strategic reserves.
According to the original design of the policy, after
reviewing the result of purchase at GMP, a high-level
committee would review the total purchase and if purchase had
fallen short of target, the committee would decide to buy the
rest at the market price to fulfil the target. This did not
happen.
Although a committee was formally set up for Punjab for that
purpose, no action was taken by the committee in time. This
illustrates once again the inherent limitation of the
government to react quickly to market and act flexibly.
However, there is no reason for despair, because overall stock
position (in both public and private hands) is much more than
last year and the actual price trend in the wheat market
indicates adequacy of supply in the market.
The most effective way to influence the price of a commodity
in the market is to increase its supply (assuming its demand
in the short-run remains unchanged). The price in the
short-run also can be influenced by expectation (which
actually works through seller’s behaviour in withholding or
releasing supply in expectation of price movement in the
future).
Keeping these facts in view, the government took the right
step in influencing the market by liberalizing import of wheat
through the private sector to increase overall supply
position.
So far, almost 900,000 tons have come to the market through
private imports and along with releases from the private
sector, wheat prices have stabilized. The new wheat policy has
thus worked effectively – so much so that there is now weak or
no demand from flour millers for wheat from the public sector
and so far releases from the government stock both in Sindh
and Punjab has been negligible.
Both the provinces are expected to end up with sizable stock
for the coming year. Import through private sector has not
required that the federal government provides any subsidy.
Considering all these facts, the government is now taking
follow-up steps to consolidate and sustain the good results
already obtained. The experience of past year’s programme and
the lessons learned will be carefully reviewed and discussed
and further stream-lining and strengthening of the wheat
policy will be made on the basis of lessons learned.
In the future, the provincial food departments and PASSCO will
compete with the private sector on equal terms in the wheat
market.
In line with the change in policy, provinces are in the
process of preparing restructuring plan for its food
departments. Provincial food departments are in the process of
recruiting consultants to help them to prepare action plans
that will include reorganization of the department,
elimination of general food aid and substituting it with
directed food subsidy for the deserving poor.
The government plans to move in a phased manner, keeping some
controls in place in the interim to ensure food security and
price stability. The government will keep a vigilant eye on
the market and plans to gradually withdraw from an active
role, letting the private sector take over the primary
responsibilities for procurement, storage and marketing.
Federal Ministry of Food, Agriculture and Livestock and the
provinces will adhere to key principles and concepts that
underlie the phased reduction in the size of public
procurement: a) The government will be only one of the players
in the wheat market. The purpose of public procurement will
gradually shift from that of maintaining a large operational
stock that dominates the market to a strategic reserve, which
will be used for price stabilization and for intervening in
the market in emergency circumstances.
The strategic reserve will be managed efficiently and cost
effectively on commercial lines. The operational stocks will
be reduced in size as the private sector takes over, so the
main stock that public agencies will hold in the future will
be the strategic reserve b) The provinces will adopt no
coercive measures to ban wheat movement from one place to
another between districts and provinces, or to force sales of
wheat to public agencies. c) The private sector will be free
to import wheat, and export by the private sector will take
place without hindrance, subject to the tariffs and
anti-dumping rules under International Monetary Fund and World
Trade Organization agreements.
(The writer is joint secretary, federal ministry of food,
agriculture and livestock).
Courtesy :
The DAWN
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Pakissan.com;
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